CHINA RELIANCE FINANCE CO LTD v. CHINA THREE-GORGE ECONOMIC DEVELOPMENT CORPORATION, GUANGDONG CORPORATION AND ANOTHER

HCCL 9/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.9 OF 2004

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J U D G M E N T

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The application

1. This is an application by the 2^nd defendant, China Merchants Bank Co. Ltd, by summons dated 21 May 2004, for a stay of the proceedings herein on the ground of forum non conveniens.

2. At the time at which this summons was drawn, relief also was sought on the basis of Order 12 rule 8.  No basis existed for this, and this element has not been pursued.

The action

3. By this action, which was commenced by writ issued on 9 March 2004, the plaintiff sues the 2^nd defendant to enforce a guarantee dated 28 November 1995.

4. This guarantee allegedly was given by the 2^nd defendant’s Guangzhou branch in order to secure the liability of the 1^st defendant, China Three‑Gorge Economic Development Corporation, to the plaintiff under a loan agreement dated 28 November 1995, whereunder the sum of US$3.5 million was advanced by the plaintiff to the 1^st defendant.

5. The 2^nd defendant, the applicant herein, is and was all material times a bank incorporated in Shenzhen, PRC.  As at the date of the guarantee the 2^nd defendant had no branch in Hong Kong; however since 1992 it has had such a branch in the territory, and thus at the time that this action was commenced it was registered under Part XI, Cap.32.

6. It follows, therefore, that the 2^nd defendant has been served in the territory and that jurisdiction has been established as of right, a proposition that is accepted, the thrust of the present application being that this court now should exercise its discretion not to exercise such undoubted jurisdiction.

7. A like situation does not prevail in terms of the 1^st defendant, the borrower of the US$3.5 million under the loan agreement in question.  The 1^st defendant is a company incorporated in the PRC with a place of business in Guangzhou.  I am told by the plaintiff that an application has been made by the plaintiff for leave to serve the 1^st defendant in the PRC, and that such service apparently is “in the course” of being effected.  However the 2^nd defendant responds that evidence before the court demonstrates that the 1^st defendant, a state owned enterprise, has had its business licence revoked by the Chinese authorities, and that this occurred on 22 April 2002.

8. The point which thus arises — and which is germane to the present exercise — is that in so far as service out of the jurisdiction on the 1^st defendant in the PRC may successfully be effected, it seems unlikely that in Hong Kong there will be an ongoing action on foot between the plaintiff and the 1^st defendant, and that the probabilities are that, as against the 1^st defendant, the plaintiff will obtain a default judgment which cannot be directly enforced in China.

The factual background

9. The loan agreement in question, which was prepared in traditional Chinese, was for the sum of US$3.5 million, with a term of one year and an interest rate of 17%.

10. It is stated to be executed in Hong Kong, the governing law is Hong Kong law, and the 1^st defendant expressly submitted to the jurisdiction of the Hong Kong court — hence there has been no difficulty in the plaintiff obtaining an order for leave to serve the 1^st defendant out of the jurisdiction.

11. In addition to the plaintiff lender and the 1^st defendant borrower, there was another party to the loan agreement, a Hong Kong company named Ever Modern Finance Co. Ltd.  The plaintiff alleges that this was a ‘window company’ of the 2^nd defendant, and although this is denied, it is evident that at the time there were connections at executive level between the two.

12. The loan agreement expressly required the provision of a guarantee by the Guangzhou branch of the 2^nd defendant, and that such guarantee was to be denominated in renminbi.  However, neither the 2^nd defendant nor its branch in Guangzhou was party to the loan agreement, and the point is made that within this document there was no reference to submission to Hong Kong jurisdiction by the 2^nd defendant.

13. The 2^nd defendant maintains that it has no record of the guarantee, the intrinsic validity and enforcement of which are disputed.

14. The guarantee itself was prepared on the paper of the 2^nd defendant’s Guangzhou branch, and, unlike the loan agreement, was in simplified Chinese.  It refers to the loan to the 1^st defendant in terms of a loan for RMB29 million, as against the loan figure US$3.5 million, and the amount guaranteed is also expressed to be in RMB.  There is reference at the end of this document to the “bank at which the Guarantor’s account is opened”, which is stated to be the People’s Bank of China, Guangzhou Branch.

15. On its face, therefore, the guarantee was intended to be security for a loan in favour of a PRC party with the obligation thereunder expressed in RMB.

16. There is, however, no statement as to the place of execution of this document, nor is there any proper law clause — which, as will shortly be seen, is an issue which looms large in this application.

17. The history of the matter is that the loan was drawn down on or about 5 November 1995.  Allegedly there was an agreement with the 1^st defendant to extend repayment until 31 December 2000, but with the exception of two partial repayments, the 1^st defendant failed to repay the loan.  Nor does it look as if the 1^st defendant is currently in a position to repay such liability, hence the attempt to recover from the 2^nd defendant as guarantor.

18. Somewhat curiously, these proceedings in Hong Kong are not the first attempt by the plaintiff to make recovery against the 2^nd defendant.  It is a matter of record that in October 2002 the plaintiff began an action to enforce the guarantee against the China Merchants Bank Guangzhou branch in the Intermediate People’s Court in Guangzhou.  However the action was withdrawn by the plaintiff in June 2003.  This withdrawal is not explained on the affidavits, and in the circumstances, and absent explanation, this court is driven to the conclusion that commencement of the present Hong Kong proceedings, which were commenced on 9 March 2004, constitutes a stark example of forum shopping.

Principles to be applied

19. There is no dispute between counsel as to the principles to be applied in an application on the basis of forum non conveniens.  These are conveniently laid out in the Hong Kong White Book 2004, see in particular M/N 1/1/10 at pp.100‑102.  Such principles, of course, stem from the judgment of the House of Lords in The Spiliada [1986] AC 460.

20. Upon a stay application upon an fnc basis, the burden lies upon the applicant to show that the court should exercise its discretion to grant a stay.  Moreover, the defendant seeking to avoid the exercise of jurisdiction which has been established as of right, and to stay otherwise legitimately constituted proceedings, must show not merely that Hong Kong is not the natural or appropriate forum for the trial, but that there is another available forum which is clearly or more distinctly appropriate than that of Hong Kong.  If this hurdle is satisfied, the question to be answered is whether trial at the other forum will deprive the plaintiff of any legitimate personal or juridical advantages.

The argument

21. On behalf of the 2^nd defendant/applicant, Mr Jat SC submitted that in all the circumstances of this case there was no doubt that the relevant benchmarks had been attained.  He moved the court for the grant of a stay, by necessary implication (although he did not, I think, expressly so stipulate) in favour of the Guangzhou court whence the action against the 2^nd defendant originally had been instituted by the plaintiff.

22. He submitted that the PRC court was clearly and distinctly the more appropriate forum, with reference to the parties and their connections with Hong Kong, wherein only Ever Modern, the party under the loan agreement, was based here, although the only surviving director of that company allegedly connected with the 2^nd defendant, a Mr Ding, is apparently now resident in Guangzhou.

23. So far as the issues in this case were concerned, said Mr Jat, these were basically four in number, namely whether the loan agreement reflected the agreement between the parties, whether it had been properly performed, whether the guarantee had been validly issued, and had complied both with internal and external legal requirements, and whether the plaintiff’s claim was time-barred.

24. His case was that the great majority of the witnesses who may be able to assist on these issues were based in Guangzhou.  Moreover, in terms of the third issue, the validity of the guarantee, serious questions arose as to the capacity under Chinese law of the 1^st defendant to borrow a foreign currency loan, and also as to the capacity of the 2^nd defendant to give such a guarantee.  In this connection it was not accepted that such had properly occurred, given that CMB Guangzhou was but a branch of the 2^nd defendant, that under Article 10 of the PRC Guarantee Law, a branch office could not give a guarantee without approval from Head Office, and that the 2^nd defendant’s witnesses (all in Guangzhou) would give evidence as to the relevant procedures and practice.

25. Moreover, said Mr Jat, if, as he submitted, the governing law of the guarantee — which was silent on the point —indeed was PRC law, under that law the guarantee would be void or unenforceable because of lack of registration and approval, and because the alleged extension of the loan discharged liability under the guarantee, and in addition and in any event, the plaintiff’s claim was time-barred.

26. Mr Jat thus asserted that when looked at from all viewpoints this was one of those instances when the requirements underpinning the grant of a stay of proceedings were clearly and obviously satisfied.

27. For the plaintiff/respondent, Mr Smith SC was undaunted.  His approach was thus.  For the purposes of his argument he placed great emphasis on the implicit choice of the proper law of the guarantee as Hong Kong law.

28. Mr Smith noted that the loan agreement was expressly subject to Hong Kong law, and that although the guarantee did not contain a choice of law clause, he argued that in such circumstances the courts readily will conclude that the parties intended the guarantee to be subject to the same law as that governing the principal contract.

29. Moreover, Mr Smith submitted, in the present case the 2^nd defendant had entered the guarantee not only qua guarantor but also as primary obligor, that is, as principal debtor in respect of the loan facility, which was a matter providing yet more reason for concluding that the parties had intended the guarantee to be subject to the same governing law as the loan agreement, that is, Hong Kong law.

30. If this was correct, said Mr Smith, the various issues under Chinese law as to capacity and illegality and absence of state approval which had been raised by the 2^nd defendant as matters to be considered in this case naturally fell away, and at trial would not need to be ventilated.

31. It thus followed, he argued, that if judgment was to be entered for the plaintiff against the 2^nd defendant this would not compel the performance in the PRC of any act illegal under Chinese law because the obligation of the 2^nd defendant under the guarantee was to pay a sum of money to the plaintiff, and that since the plaintiff is a Hong Kong company based in Hong Kong the obligation to pay the sum due would be satisfied by payment of the money in Hong Kong.

32. Mr Smith further submitted that even if he was wrong in his argument that by necessary implication the proper law of the guarantee was not Hong Kong law, nevertheless there were sufficient connecting factors in this case to render Hong Kong the natural and appropriate forum.  In particular, he noted, the plaintiff was a Hong Kong company, and Ever Modern Finance, a party to the loan agreement, was also a Hong Kong company.

33. He also argued that notwithstanding the plaintiff’s long list of witnesses said to be in Guangzhou, on analysis few of them were of any direct relevance, and the three persons that had been involved in the transaction on the plaintiff’s side were available in Australia and Hong Kong, and that so far as there may be any relevant witnesses in Guangzhou there would be little or no inconvenience in their coming to Hong Kong.

34. Accordingly, he asserted that this application should be dismissed.

The proper law issue

35. Given the relevant principles governing the grant of a stay of proceedings on the ground of forum non conveniens, perhaps the central issue in this case lies in the identification, or provisional identification, of the proper law of the guarantee.  If, as Mr Smith contends, the proper law confidently can be regarded as the same system of law as that governing the primary obligation, namely, the loan agreement, then it would be difficult to justify removing this case from the presently established jurisdiction of Hong Kong.

36. The problem, of course, is that at this interlocutory stage the court is in no position to make a finding of fact as to the proper or governing law of the contract of guarantee.  This can only be done at the trial of the action.  What, then, is the appropriate approach?

37. The only practical solution lies in the concept of the ‘good arguable case’.  Has the 2^nd defendant applicant, which bears the evidential burden in applications of this nature, succeeded upon a ‘good arguable case’ basis in its submission that the governing law of the guarantee is PRC law?

38. Mr Jat accepts, I think, the proposition established in the line of cases to which I have been taken by Mr Smith, to the effect that in general the governing law of the collateral contractual instrument, the guarantee, tends to follow that of the primary obligation, the loan agreement.  He suggests, however, that the present instance is one of those cases to which the usual rule clearly should not apply.

39. Putting aside the evidence that in the plaintiff’s erstwhile PRC proceedings, since withdrawn, the plaintiff’s lawyer expressly had accepted that the governing law of the guarantee was that of the PRC, and had addressed the court on that basis, Mr Jat prayed in aid certain factual matters which, he submitted, make this an unusual case, and which substantiated his argument that it is PRC law which governs this instrument.

40. He noted that the guarantee document was prepared on the paper of the 2^nd defendant’s Guangzhou branch and was in simplified Chinese, in contrast to the traditional Chinese used in the loan agreement.  On its face it was intended to be security for a loan in favour of a PRC party, and that the sum guaranteed was to be in RMB, not in United States dollars, the currency of the loan. The guarantee even specified a Guangzhou branch of the People’s Bank at which the guarantor was to open an account — presumably for the facilitation of any payment to be made thereunder — and these matters, he suggested, strongly supported the proposition that the place of performance was intended to be in the PRC, more particularly in light of the forex restrictions then in force, and the lack of a clearing system for RMB in Hong Kong, which was not established until the end of 2003/beginning of 2004.

41. In addition, submitted Mr Jat, the absence of any statement on the face of the document as to where it was executed would suggest that the place of execution must have been in Guangzhou — indeed, even on the plaintiff’s own evidence the clear inference must be that it already had been executed by CMB Guangzhou before being brought to Hong Kong in light of the statement of Mr Wang, the financial controller of the plaintiff, that before the loan agreement had been signed “we first reviewed the execution of the Guarantee by the 2^nd defendant which bore the official seal of the Guangzhou branch of the 2^nd defendant” together with the personal seal of its general manager, and that the executed guarantee was delivered to the plaintiff after the loan agreement had been signed.  In this context I bear in mind also the observation by Mr Wang that whilst the loan agreement was ‘tailor-made’, the guarantee had been prepared using a standard form precedent “located by either the plaintiff or the 2^nd defendant”.

42. Mr Jat further contended that, in light of the circumstances as are currently known surrounding the creation of this document, the absence of a proper law clause in the guarantee in itself was significant — given the near and very substantial PRC connection, he said, if it were intended by the parties that Hong Kong law would apply and that the Hong Kong court should have jurisdiction, an express term to that effect, as in the case of the loan agreement, might reasonably have been expected.  Nor did he accept that in this matter the scales had been tipped by the fact that the guarantee recognized a primary obligation upon his client; unlike the position in ‘pure’ guarantees, he contended, which imposed solely a secondary obligation, the inference arising from the 2^nd defendant as primary obligor served to buttress his contention that it could not necessarily be inferred — as Mr Smith had argued — that the proper law of the guarantee had been intended to follow that of the loan agreement.  If his client was to be in the position of primary obligor, why should not his client be pursued in the Chinese courts, as indeed had been the case at the outset, before the withdrawal of those proceedings and the institution of this Hong Kong action?

43. At the end of the day, in a situation in which, as here, the instrument underpinning the cause of action is silent as to choice of law/jurisdiction, there must be a search for the system of law with which the transaction has its closest and most real connection.  I recognize, of course, that the choice of law provision, whether express or inferred, within the loan agreement is a material factor in any such evaluation, although this is not conclusive.  I have reflected upon the arguments on both sides, together with the known circumstances surrounding this guarantee, and whilst, as earlier observed, I am in no position to finally decide this point at this stage, in my view Mr Jat has succeeded in establishing a good arguable case to the effect that the proper law of the guarantee is PRC law. There is no suggestion that the 2^nd defendant’s representative office in Hong Kong had anything to do with this transaction, nor was there any suggestion that the 2^nd defendant had assets in Hong Kong to be executed upon should the guarantee have been called in 1999, and it seems to me that there is much in the contention that the intention must have been that the guarantee, which looks as if it was executed in Guangzhou, would be performed in Guangzhou and paid by or from the account opened for the purpose by the 2^nd defendant.

Decision

44. If this conclusion be correct, of course, this has a signal effect upon the present application for a stay of proceedings.  A PRC court clearly is in the best position to evaluate the complexities of the several defences under Chinese law which are to be raised by the 2^nd defendant in this action.

45. Whilst each counsel stoutly adhered to the position that even if the proper law of the guarantee appeared to be other than as each respectively was contending, nevertheless there remained sufficient within the known factual matrix to support their respective arguments on this stay application, it struck me then, as now, that consideration of the putative proper law remained the dominant factor in the evaluation that the court is required to carry out in applications of this nature.

46. I place into the equation, also, the fact that it appears most unlikely in the circumstances, given that which is known about the 1^st defendant, that there will be any ongoing proceedings in Hong Kong absent the 2^nd defendant, and I bear in mind, also, that Ever Modern is not a party to these proceedings, nor is it alleged to be a subsidiary of the 2^nd defendant, albeit obviously there had been some past connection.

47. Turning now to the issue of witnesses, each side criticizes the other’s arguments in this regard, and it does not seem to me that witness availability is a crucial consideration either way, although perhaps the scales are slightly tilted toward the 2^nd defendant in this regard.

48. The issue of costs also is far from crucial, although once again in so far as it impacts this consideration again falls on the 2^nd defendant’s side of the line.  Moreover all relevant documents are in Chinese, and there is no evidence of any procedural impediment in the plaintiff returning to the Chinese court in which these proceedings initially were commenced.

49. At the end of the day the short and inescapable point is that this is a claim against a PRC branch of a PRC bank on a guarantee denominated in RMB in relation to a loan given to a PRC borrower, and wherein there is a good arguable case that the proper law governing the obligation is PRC law.  The plaintiff’s commencement of proceedings in the PRC court in 2002, at a time when the 2^nd defendant already had established a branch in Hong Kong, thereby permitting jurisdiction to be established as of right if such had been desired, was, as Mr Jat commented, an act representing an acknowledgment of the obvious, namely, that the PRC court is the natural and appropriate forum, and there has been no explanation forthcoming as to the withdrawal of this particular action, unless of course it was feared that defences available under Chinese law, which would not be thus available under Hong Kong law, may have successfully defeated the plaintiff’s claim.

50. In light of all the circumstances of this case, in my judgment Hong Kong is not only not the appropriate forum but the PRC court is clearly and distinctly more appropriate for the determination of this claim, and I am unable to see that trial at this other forum will deny the plaintiff of personal or juridical advantages such as to preclude the exercise of the discretion of this court in staying the present proceedings to such PRC court, which in the circumstances will no doubt once again be the People’s Intermediate Court of Guangzhou.

51. In my view, therefore, this is one of the rare instances, at least in the Commercial Court, in which an application for a stay on the basis of forum non conveniens successfully has been made out.

Order

52. In light of the foregoing the order of this court is thus :

(i)      that there be a stay of the proceedings herein in favour of the People’s Intermediate Court of Guangzhou or some other appropriate forum in the PRC;

(ii)      there be a costs order nisi that the costs of this application be to the 2^nd defendant, such costs to be taxed if not agreed.